The $700 Billion Cram-Down-No-Doc-Proposal

Market historians may recall that just prior to the banking crisis that led to FDR declaring a 2 week banking holiday, FDR approached Henry Ford in February 1932.

The reason FDR approached Mr. Ford was that Ford had threatened to withdraw $20 million from a local bank. If Ford did that, it would spark a chain reaction of bank closures throughout the Midwest. Hence, recognizing Ford could spark a run on banks throughout the Midwest that could go nationwide, FDR sent two of his men to persuade Ford not to withdraw the $20 million. After politely listening, Ford told FDR’s men, “All right then, let us have it that way, let the crash come. If everything went down the chute, there would be a cleaning up process and everybody would have to get to work.” Whatever happened, said Ford, he was sure he could build up a business as he still felt young.

Henry Ford withdrew his money, and two weeks later, the banking crisis came. FDR declared a banking holiday for two weeks. Banks reopened two weeks later. The stock market bottomed 9 months earlier in the summer of 1932 (the stock market was so demoralized it had bottomed ahead of the peak of the 1933 banking crisis). In the summer of 1934, all the remaining banks were back on a safe and sound basis, thanks to the RFC. The moral of this story is that at the moment that the banking crisis reached its peak, the worst was already behind us for most Americans.

Seems to me, we are precisely in the same moment that FDR’s men made his appeal to Ford at the height of the banking crisis in 1933. Additionally, this storied appeal for $700 billion, seems like pages torn out of Mother Goose tales. Only the characters have changed. Instead of FDR’s men, we have Henny Penny (Hank Paulson) and Benny Penny (Ben Bernanke) running to tell the king’s men (Congress) that the sky’s falling. Not only was the sky falling in Henny and Benny’s estimation, but that there was a big bad wolf at the front door to blow the house of cards down (literary license being taken to mix the mother goose tales). Yet, oddly enough, neither Paulson or Bernanke are forecasting a depression or even a severe recession. That seems rather inconsistent with their heralding the “sky-is-falling” on Capitol Hill this week!

Remember, Henny Penny and her friends came upon Foxy-Woxy who knew a short-cut to the king. Foxy-Woxy led them to his fox hole where he bit off all there heads. The moral of that mother goose story is forget about taking the short-cuts. Someone might mention this to Mr. Paulson and Mr. Bernanke, and tell their banking friends that they can take the long way home, thank you very much!

Another thing happened this past week. After Henny and Benny Penny went to tell the king the sky was falling last week, the rest of America woke up the very next day only to notice that the sun had come up. Not only did the sun come up, but they still had their jobs to go to. And when their day of work was done, lo and behold, the bars were open and a good stiff drink could be had by all.

We all know there is a big bad wolf out there, Henny Penny! And we know exactly why he is here. He is here to blow that fragile house of cards down which had been so diligently crafted by our financial alchemists on Wall Street.

But, riddle me this, why should Paulson and Bernanke be so afraid of the big bad wolf? Think Hank, for just a moment if you will, what one is supposed to do in a tornado. You open the windows a crack to let the wind blow through the house while you hunker down in the basement.

The Wolf that is here to blow the house down has a LEGITIMATE Economic Function to serve. Let us not obstruct justice, here Hank! Let that damn wolf blow the house of cards down. Let’s let him do his job so that we can move on with the ‘clean-up’ process. If we don’t let the wolf do what he is supposed to do, we could risk another bubble in Josh Rosner’s estimation (yes another bubble-blowing event is what this could turn into!). Rosner believes that a valuation bubble could be created if the govt pays the price that bankers are willing to sell at rather than the firesale price in the market today.

In my mind, the risk I see of not letting the wolf blow the house down is hyperinflation. Price stability would destabilize. This is the risk of too much government intervention, of too much Keynesian economics. Push the Keynesian model too far, and it will blow up on Washington and Uncle Sam next, just like the subprime Trojan Horse blew up Wall Street this past year. And if Uncle Sam blows up, that means we the taxpayers blow up Paulson and Bernanke’s $700 billion plan is an extension of the very model that got us in this damn mess to begin with! That model is broken! Why doesn’t someone tap them on the shoulder and tell them so?

Doesn’t Bernanke understand the consequences if he pushes the model too hard? It would not be unintended consequences, if he does. It is a logical consequence of pushing the Keynesian model of government intervention way too far, way farther than Keynes himself ever intended.

If Ben is afraid of how demoralizing a Depression is, he should also consider how demoralizing hyperinflation was on the Weimar Republic in the 1920’s. The demoralization of 1920’s Germany is what produced a monster like Hitler. As Senator Bunning put it Wednesday, “We haven’t even passed this bill yet and already Americans are paying for it because of the fall of the dollar as a result of all the new debt we will be taking on.” As Senator Enzi informs us, “this plan if approved in its current form will cost every man women and child approximately $2300.” Enzi’s estimation was close to my own. Remember that $600 rebate check in the spring of 08 that cost Uncle Sam $150 billion. Well, $700 billion is 4.7 times $150 billion, so roughly it would cost every working man and woman $2820.

Let us not forget, once we go down this path there is no turning back. When the Treasury needs to handout more money, they will go to Congress time and again to go get it, and they will rubber stamp that too, also at taxpayer expense. So $2820 is just for starters, a warmer upper if you will. And that is all I have to say about this matter.

Feel free to email your congressman this rant, and feel free to express your own feelings on this matter to your congressman. They will rubber stamp this proposal without considerable dissent. The squeaky wheel gets the grease, baby! So squeak your little hearts out, and be heard if you will.

Disclosure: None.

Comments

[Al-USA:]

So the options are a Depression or a very bad case of hyperinflation? Great... Those free market, no holds barred deregulation ideologue Republican bastards have really done it to the little guy...

2008 Sep 27 07:48 AM

[angry:]

When the Hearings begin who will play Ferdinand Pecora?

We know Hank Paulson is perfect for the part of (protect your friends) Andrew Melon, Lloyd Blankfein can play Charles "Sunshine Charlie" Mitchell and John Mack can play Baker... and we are playing the suckers who got stuck with the millions (now billions) in peruvian sugar bonds!

www.counterpunch.org/c...
Ferdinand Pecora:An American Hero

2008 Sep 27 08:16 AM

[I need a ba...:]

Your question is "why should Paulson and Bernanke be so afraid of the big bad wolf?"

There was no bailout announcement during the failures of Lehman, Freddie, Fannie, AIG etc. But when Goldman started to drop toward $100 per share there was the bailout idea / announcement by Hank Paulson / George Bush. Why did the bailout come at this time? It is because Paulson owns $500 million of Goldman stock. If you were going to lose that kind of cash you would bow down / get on one knee to whomever you thought could save your ass!!! In fact, some of you may have done a lot more for Nancy!

2008 Sep 27 09:29 AM

[AngusA:]

We should include those organizations tabbed to get 20% of the profits from this "bailout" (read: ACORN, Urban League, ...). They significantly influenced the origination of this "subprime" mess such that many who could not afford a mortgage could get one.

2008 Sep 27 11:34 PM